美卡多 (MELI) 2019 Q2 法說會逐字稿

Hello, everyone, and welcome to the MercadoLibre earnings conference call for the quarter ended June 30, 2019.

I am Federico Sandler, Investor Relations Officer for MercadoLibre.

Our Senior Manager presenting today is Pedro Arnt, Chief Financial Officer.

Additionally, Marcos Galperín, Chief Executive Officer; and Osvaldo Giménez, Executive VP of Payments, will be available during today's Q&A session.

This conference call is also being broadcasted over the Internet and is available through the Investor Relations section of our website.

I remind you that management may make forward-looking statements relating to such matters as continued growth prospects for the company, industry trends and product and technology initiatives.

These statements are based on currently available information and our current assumptions, expectations and projections about future events.

While we believe that our assumptions, expectations and projections are reasonable in view of the currently available information, you are cautioned not to place undue reliance on these forward-looking statements.

Our actual results may differ materially from those discussed in this call for a variety of reasons including those described on the forward-looking statements and Risk Factor sections of our 10-K and other filings with the Securities and Exchange Commission, which are available on our Investor Relations website.

Finally, I would like to remind you that during the course of this conference call, we may discuss some non-GAAP measures.

A reconciliation of those measures to the nearest comparable GAAP measures can be found on our second quarter 2019 earnings press release available on our Investor Relations website.

Now let me turn the call over to Pedro.

Great.

Thank you.

So let's dive straight in and let me kick off this quarter's call by saying that we are pleased and optimistic about how this year is playing out.

We've delivered another very strong quarter from a gross billings perspective as we continue to grow and gain scale on our leading e-commerce and FinTech ecosystems across Latin America.

Let's first take a look at how we closed a great second quarter that carries us into the third quarter of 2019 with solid momentum.

The following KPIs place consolidated quarterly results within context.

Gross merchandise volume accelerated to 33% year-on-year on an FX-neutral basis, reaching $3.4 billion.

Total payment volume also accelerated versus the prior quarter to 90% year-on-year on an FX-neutral basis to $6.5 billion, while total payment transactions grew in triple digits at 112.5% year-over-year and reached 182 million payments processed.

Gross billings grew 73% year-on-year on an FX-neutral basis ascending to $606 million.

We're encouraged to observe these robust rates of growth in key performance indicators, all of which are pointing to increasing consumer validation of the innovative product and service offerings we have built around e-commerce and FinTech.

As a result of this, and given the size of the opportunity, we continue to garner confidence in our cycle of investing aggressively to add more users at the expense of near-term profitability.

Let me now walk you through our FinTech progress report.

During the quarter, total payment volume accelerated both in dollars and on an FX-neutral basis driven for the most part by off-platform TPV growth.

The latter not only explained the majority of total TPV growth during the quarter but reached an important milestone during June as that was the first month that TPV from off-platform surpassed on-platform TPV in our history.

In line with that, consolidated total payment transactions also grew triple digits driven by strong growth in off-platform transactions as a result of the performance in the growth of transactions across our product portfolio of merchant services, MPOS and wallet initiatives.

Off-marketplace, in other words off-platform, total payment transactions grew 233% year-on-year, the second consecutive quarter of total transactions in number from off-platform growing above 200%.

We also continue to execute well on our MPOS business.

Device sales grew again during the second quarter in Brazil, Mexico and Argentina, while at the same time, the size of the active installed base of MPOS devices continues to grow.

On a consolidated basis, we have more than doubled the number of quarterly active devices versus the second quarter of last year, while MPOS TPV both in dollars and on an FX neutral basis grew triple digits in all of the countries where we offer the device.

Also and as a result of this solid execution, MPOS devices that processed at least 1 transaction over the last 12 months on a consolidated basis almost reached 3 million.

Our merchant services business, where we process payments of other online businesses, had an exceptional quarter both in terms of merchant net new adds and TPV growth.

On an FX-neutral basis, merchant services total payment volume accelerated to 130% year-on-year, reaching $1 billion for the first time ever in a single quarter.

Additionally, and a result of the aforementioned TPV growth of this business, merchant services revenues accelerated for the third consecutive quarter to 113% year-on-year on an FX-neutral basis.

On our wallet initiative, we observe that the shift to a mobile-first digital payments ecosystem continues to resonate with our users.

As such, we are fortunate to benefit from increasing secular tailwinds as cash digitalizes and more aspects of the lives of our users become mobile.

Consequently, during the quarter, wallet total payment volume accelerated both in U.S. dollars and on an FX-neutral basis to 251% year-on-year and 419% year-on-year, respectively, driven mainly by successful execution in Argentina, the first market where wallet initiatives were launched.

Complementing this solid growth, and also helping us scale out the buildout of our network of digital mobile wallet, during the second quarter, we have more than doubled the issuance of prepaid cards tied to wallet account balances versus the first quarter of 2019.

Additionally, we are encouraged to see TPV coming from these prepaid cards continue to grow in triple digits both in dollars and on an FX-neutral basis.

Still on our wallet initiative, during the month of June, we reached the 3 million monthly active payer mark on our mobile wallet in a single month for the first time on a consolidated basis.

We are also making inroads building and distributing innovative and inclusive asset management products for our users as adoption of our asset management solution continues to grow.

During the quarter, in Argentina and Brazil, the countries where the product is available, already over half of MercadoPago balances in both countries were invested in these asset management products.

Lastly, on FinTech, let me give you an update from our merchant and consumer credit business.

During the quarter, Mercado Crédito delivered healthy metrics.

Loan portfolio grew 75% year-on-year and 44% quarter-on-quarter in U.S. dollars driven by the successful rollout of consumer credit and MPOS credit product in Brazil and by retraining of our behavioral credit scoring models that have enabled us to roll out the product to new users with improved credit terms and conditions.

We're also pleased to report that Argentina also contributed to the loan portfolio growth as we have begun offering loans to consumers to purchase away from our marketplace.

This is the first country and we look forward to replicating this consumer credit business line in other markets as it is the largest addressable market in terms of size and a potential source of very relevant profit stream for us going forward.

With that, let's now move on to marketplace and logistics.

On a consolidated basis, marketplace GMV on an FX-neutral basis accelerated versus the prior quarter growing 6 percentage points faster.

Unique buyers as well as new buyers delivered robust rates of growth as well with unique buyers accelerating to 21% year-over-year while new buyers accelerated 14% growth, respectively.

Supply is also growing nicely as live listings grew for the tenth consecutive quarter above 50% year-on-year reaching 224.1 million live listings.

On a market-by-market basis, let's start with Brazil.

FX-neutral GMV accelerated almost 10 percentage points versus the first quarter of 2019 to 27.1% year-on-year.

This sequential acceleration was driven in part by easier comps as we had the trucker strike and the World Cup during the same quarter last year as well as greater investments targeted to generate traffic and improve conversion rates.

Mexico continues to maintain momentum growing almost in line with the first quarter of 2019.

On an FX-neutral basis, GMV grew 45% year-on-year as assortment quality continues to grow.

Mexico is the country with the highest official store penetration at almost 18% of GMV.

Another positive readout for the hypercompetitive Mexican market is that our Net Promoter Scores are also taking higher, signifying growing user promotion of our platform.

Moving south to Argentina.

Despite the implementation of a ARS 10 flat fee during April, our marketplace continues to show resilience growing FX-neutral gross merchandise volume meaningfully above the rate of inflation while also accelerating traffic.

On an FX-neutral basis, GMV grew 63% year-on-year on the back of solid 57% year-on-year growth during the same period last year.

Growth in apparel and home and garden verticals were highlights during the quarter.

On the mobile front, mobile app GMV surpassed 50% of total GMV during the month of June for the first time, while our e-commerce app ranked #1 on Android Play Store in Argentina, Brazil and Mexico.

Also registrations through mobile devices grew over 10 percentage points year-on-year to 80% of all registrations as we successfully transition users from desktop to mobile.

Let's now move on to the buildout of our warehousing and logistics managed network, another strategic building block and critical enabler of our enhanced marketplace.

We continue adding more product features and tools for our merchants into our proprietary logistics and warehousing management technologies while also improving productivity in those distribution centers.

The latter initiatives should also enable us to add more verticals to our logistics network and consequently help us drive higher penetration as we head into the coming quarters.

On a consolidated basis, managed network penetration continued to gain share from drop-shipping as it gained 16 percentage points year-on-year reaching 26% of items shipped.

These gains were driven mainly by execution in Argentina and Mexico.

In Argentina, MercadoEnvíos penetration reached an all-time high of 62% of items shipped versus 42% last year driven by the successful adoption of MELI Flex shipping platform, which reached 8% of items shipped.

It's important to highlight here that MELI Flex adoption is positively impacting the efficiency of MercadoEnvíos in Argentina as almost 60% of Flex shipments are same-day.

Additionally, we also continue to optimize lead times through addition of more zone skipping routes in Argentina and improved service levels on existing ones, also contributing to higher Envíos penetration we delivered in the second quarter.

On the fulfillment front, not only did we successfully initiate operations of our 65,000 square meter fulfillment center in Buenos Aires with adoption numbers that give us confidence that we can continue scaling the solution as we enter into the back half of 2019 but also our fulfillment operations in Mexico exceeded expectations, growing 27 percentage points year-on-year reaching 29% of items shipped.

Additionally, and as part of our efforts to expand our managed network during the months of May and June, we also successfully launched our MELI Logistics platforms in Brazil and Mexico.

Along with Flex, MELI Logistics is another innovative proprietary logistics platform that we have built from the ground up to prop up the scale and reach of our managed networks.

It combines in-house technology and existing physical distribution capacity to reduce dependency on traditional carriers, shorten lead times, cost and perhaps more importantly, to significantly enhance the end-to-end shipping experience for our buyers.

Lastly on logistics, the Brazilian managed network penetration increased 13 percentage points versus last year driven for the most part by our cross-docking centers and initiatives.

As of the second quarter, 20% of all items shipped went through our own managed logistics network of cross-docking and fulfillment.

Although penetration of fulfillment solution was flat versus last quarter in Brazil, we have continued iterating to improve processes, productivity and also improve our warehousing management technology and algorithms.

As a result, we have observed a reacceleration of adoption of our fulfillment solution in the back end of the quarter, generating expectations on our end that we have positioned ourselves to drive higher merchant adoption of fulfillment during the second half of 2019.

Now that I've covered the main highlights and KPIs for the quarter, let's move on to financials, where we began to accelerate the pace of investment in our growth initiatives as we move into the back half of 2019.

During the second quarter, gross billings ascended to $606 million and grew 73% year-on-year on an FX-neutral basis.

The latter, I remind you, marks the 21st consecutive quarter of gross billing growth above 60% driven by continued monetization on our marketplaces as well as successful execution on our FinTech initiatives.

In particular, our financing business, merchant and consumer credit and off-platform payments processing through our merchant services and MPOS businesses have been strong drivers of this growth.

Gross billings in our main countries on an FX-neutral basis was robust across the board.

Mexico delivered a sixth consecutive quarter of growth above 50%, while Brazil and Argentina maintained momentum growing 55% and 117% year-on-year, respectively.

Consolidated net revenues grew faster than gross billing on an FX neutral basis, accelerating to 102% year-on-year and reaching $545 million as we continued calibrating and optimizing shipping and loyalty program subsidies and implemented flat fee initiatives in Argentina for the full quarter.

Gross profit ascended to $272 million, representing 50% of revenues during the quarter versus 48% a year ago.

The 233 basis points of scale year-on-year was driven for the most part through collection fees and sales taxes, which were partially offset by shipping subsidies and warehousing costs as our managed logistics network expands.

We've included a detailed breakdown of these and also other OpEx margin evolution in the slides that accompany this presentation.

Consequently, as reported, operating expenses ascended to $285 million or 52% of revenues versus 56% during the second quarter of 2018.

On a sequential basis, however, operating expenses increased almost 26% explained for the most part by increases in marketing expenses as we began to invest more aggressively in customer acquisition for our multiple product lines as well as new head count we've added to our engineering product development teams, which increased by over 50% versus the same period last year.

Operating losses decreased to negative $12.5 million as a result of the aforementioned investments.

We saw $14.7 million in financial expenses attributed for the most part to interest accrual on our convertible notes due 2028.

Interest income increased by 240% year-on-year to $33.7 million attributable to the proceeds from the convertible note and the follow-on offering proceeds from earlier this year.

Our ForEx line was $0.8 million mainly as a result of the strengthening of the Brazilian real over the U.S. dollar net liability position in Brazil during the second quarter of 2019.

We delivered an income tax gain of $8.9 million attributed for the most part to tax loss carryforwards in Mexico which were partially offset by income tax expenses in Argentina and Brazil.

Net income ascended to $16.2 million for the second quarter of 2019, resulting in a basic net income per share of $0.31.

In summation, we feel we've delivered another great quarter, which leaves us on a strong footing to pursue our strategic objectives in the second half of 2019 and beyond.

Our focus will be on disciplined execution against our priorities as we aspire to be a leading platform for mobile digital commerce and FinTech throughout all of Latin America.

We have already built out a well-diversified product portfolio across multiple countries and are confident that the strength of these business lines, the flexibility of our balance sheet offers us and the still nascent digital opportunity in Latin America will continue to enable us to deliver long-term value to all our stakeholders as we move into the rest of 2019 and beyond.

And with that, we can now take your questions.

(Operator Instructions) Our first question comes from Stephen Ju from Credit Suisse.

So Pedro, some -- thinking through the mobile point-of-sale opportunity, it seems like the per merchant utilization rate seems to be a fraction of where some of your competitors are probably right now.

So given that the size of the merchants that you have may be smaller, but can you talk about what you may be able to do to drive faster per device TPV?

And secondarily, I don't think we've ever seen a sequential dollar pickup in sales and marketing spend from Q1 to Q2 at the level that you showed on this report.

So can you talk about where the main focus of that incremental spend may be and whether it's consumers [some are facing?] Okay.

(technical difficulty)

Ladies and gentlemen, please continue to hold.

Your call will resume momentarily.

Are you there?

Hi, Stephen, sorry about that.

(technical difficulty)

Let me start again.

We have technical problems.

So Stephen, part of what you see in terms of per merchant decision rate are, if you want by this time, we started there.

MPOS, this is the first address at the very low end of the long tail of the market and that is where we have been gaining a lot of traction.

And so it is to be expected that the number of transactions per device is more than some of our competitors.

Having said that, during last quarter, we started to move upmarket, we launched in new device towards the end of last quarter where we are starting to address small business, but not the low end of the long tail as we are addressing before.

So as the strategy moves forward we believe will be addressing these upmarket segments that we have not addressed in the past.

Great, and second question very quickly, Stephen.

I think the second quarter many times is somewhat heavy on marketing spend.

It's when the hot sale occurs in Mexico.

So there's always increased investment there.

Having said that, I think this year, what you see is the growing number of product lines we have, particularly in FinTech that we begin to invest more aggressively behind in terms of marketing, and also a renewed focus on brand-building and brand marketing investments.

Part of that is to just start generating the MercadoPago brand and subbrands around MPOS, credits, merchant services, but some of that is also to strengthen the marketplace brand equity positioning.

If you look at it on a country basis, you will realize that's pretty much spread even across the significant margins, the pickup in marketing spend.

Our next question comes from Robert Ford from BOA.

Congratulations on the quarter.

Osvaldo, can you discuss the wallet funding frictions across the major marketplaces and how you're addressing those, please?

Hi Bob.

So I would say that this is a change in a country-by-country basis.

We made a lot of progress with the last few weeks in Argentina and we are in the process of making that same progress in Brazil.

First, in Argentina.

In the last few weeks, we were able to -- (inaudible) from -- transfers from many bank accounts through (inaudible) of BU.

So we are able to receive transactions or transfer from any bank account, and that is way easier than what it used to be in the past.

And in the case of Brazil we are integrated right now with SPB, which is (foreign language) and we expect that also to make funding significantly easier than what it has been so far.

That's helpful.

And can you talk a little bit more specifically on the growth of the mobile wallet 2-sided network in Brazil in terms of the number of players, collectors and the frequency?

And then maybe can you share with us what you're doing there to make the wallet stickier?

It seems that you've got several successful strategies in Argentina and I was wondering how difficult it is to replicate that in Brazil.

Hi, Bob.

Let me -- we have not disclosed numbers of specific payments in the wallet [initiatives], so let me give you a qualitative approach.

As we've said in the past, we are probably 1 year behind what we were in Argentina.

We were later to launch but we are starting to see traction both in terms of some large merchants where we are adding and also in terms of consumers who are starting to use the platform and we're starting to see monthly growth rates that are very interesting.

As we mentioned in the past, we know this market will take longer to develop than they were in Argentina.

It seems we are required many times, integrations we've (inaudible).

But we are encouraged by the results we are seeing.

Our next question comes from Edward Yruma from KeyBanc Capital.

I guess first in Brazil.

I know you're seeing to remediate some of the issues that you encountered there, but maybe digging in a little bit deeper, what do you think caused kind of the flat penetration to 1Q?

And then I guess second, obviously some big competitors moving into markets like Mexico.

Any change you think in the competitive environment that you're observing thus far?

Can you just clarify which penetration you're looking at if it's fulfillment by MercadoLibre or which adoption of which metric?

Yes.

The fulfillment by MercadoLibre.

Great.

Yes.

So just to put that in context, I think what we said in the earnings is that we saw a quarter that exited on actually a much more positive note than it started.

So a lot of the initiatives in terms of investments and technology behind making it easier for sellers to adopt our fulfillment solution and also incentives for them to adopt our fulfillment solution are beginning to gain traction.

That's encouraging.

I think also very importantly when you look at the endgame here, the endgame is to improve the cost and the quality of deliveries in the country.

And I think the other side of the coin for Brazil in fulfillment is the cross-docking efforts, which are evolving extremely well.

And consequently, Brazil already has 1/5 of all volume going away from the dropship market, which is not that far behind where Mexico is.

So all in all, I would say overall shipping strategy in Brazil continues to perform very well driven primarily by cross-docking.

But also when we look at the end of the quarter, adoption of fulfillment was beginning to ramp up.

Let's see how that evolves over the next few quarters if it becomes a trend, which we hope that is the case.

And then the competitive environment in Mexico?

In terms of the competitive dynamic in Mexico on retailing business, I don't think there have been any significant changes over prior quarters.

I think Mexico continues to be hypercompetitive.

We continue to see very strong performance from our business.

And I think we're pleased with the GMV growth we continue to deliver there, and obviously, the financials have begun to improve considerably from a top line perspective as we got more efficient and rationalize more and more our free shipping spend.

Our next question comes from Deepak Mathivanan from Barclays.

It's Trevor on for Deepak.

First question, can you elaborate on a little bit on the GMV growth in Brazil?

The 27% was faster than the overall e-com growth but the comp was a lot easier and you have strong momentum on various categories.

Is there anything specifically that you can highlight that maybe is going to offset some of these tailwinds?

I know you guys don't give guidance, but is this sort of the run rate we should expect going forward?

Second question, on the FinTech side, can you talk about their frequency increase on some of the new use cases that you're launching?

Or should we expect them to age along the lines of new use cases and merchant categories?

So let me take the Brazil number first.

Osvaldo can take the payments question.

I think like we've said, going forward with Brazil, we've done a lot of innovative work around improving shipping not just the quality but also the pricing around that.

And so hopefully, that continue to generate positive momentum going forward.

Additionally, from a comp perspective, I think the tougher comps are behind us.

So who knows how much we'll grow?

We'll give that out once we report future numbers.

I think in general terms, we'll continue to have an ambition to gain market share and to continue to grow faster than the market is growing.

And if we remain focused on the innovation that we've been delivering on the marketplace front, that should play out favorably.

And regarding the second question, regarding FinTech, we are seeing increasing frequency, and probably the one place where we see the most is in Argentina.

We do wallet where over the last year what we have seen is, the number of transactions per user is increasing and also the number of users who do, let's say 2, 3, 4 or over 5 transactions per month is also increasing.

And when we look at that and try to understand why that is happening, we see that those users who adopt multiple flows of payments are accelerating the growth.

By that, I mean this is what we're doing.

(inaudible) one kind of transaction such as paying with a QR code or topping up a mobile phone or paying for a utility.

And we get users to do more than 1 or 2 of these flows in a given month, we're getting them to significantly increase their frequency of use.

So we are in the process of ramping that up in Argentina and trying to replicate it in Brazil and Mexico.

Our next question comes from Ravi Jain from HSBC.

I have 2 quick questions starting with Pago first.

The credit business is scaling up nicely.

So could you give us some color on what are the really key initiatives that you are focusing on for now and how you want to manage risk around the credit business?

And second thing on the e-commerce coming back, following up on the Brazil question, is how's the competitive in Brazil, you are seeing?

Is it getting more competitive?

Is it neutral?

I mean how are you seeing like the new product categories that you're focusing on, which is mainly apparel and the basic items?

So in terms of the credit business, as you have said, they are -- they have been able to scale during this year.

Part of the things that have been going very well are the consumer credit business which we launched in Brazil last year and in -- we're in the process of launching in Mexico, and in Argentina we have gone beyond (inaudible) to buy, to include personal loans.

So we are already offering credits in Argentina where people can take the money and up it in our platform but just take it to the bank account and withdraw it and then pay us back.

And all of these initiatives have shown lots of traction and those are what are driving the consumer business this year.

In terms of merchants, as we see in the [script], what we have been doing is we've been able to improve our models.

And as we improve our models, we are more comfortable reaching out to more merchants and offering them the larger loans.

Great.

In terms of Brazil competitive scenario, again, I think no significant shift from the last few quarters.

Brazil has always been a very competitive market with multiple players.

I think we've seen some nice share gains this quarter when we look at consolidated market numbers.

From a category perspective, I think apparel continues to perform well for us.

Consumer packaged goods, which was the other question, I think is more of an opportunity going forward perhaps the back half of this year, beginning of next year.

And when we break down market share gain opportunities on a category-by-category basis, there clearly are categories that we still haven't fully explored and that we hope to tackle moving forward.

So I think there's still room for us to sustain our leadership and even gain in terms of share as we focus on these categories and just in general on continuing to improve the user experience that we offer in that market.

Our next question comes from Irma Sgarz from Goldman Sachs.

Two quick questions.

Firstly on the TPV, you've obviously reached a milestone this quarter with off-platform TPV in June surpassing the on-platform TPV.

And I think you've, even in the past sort of consistently said that you see room for obviously having the off-platform TPV growing to multiple times the volume on the on-platform TPV.

Now I was wondering, as you sort of think about the road map going forward, do you still think that it makes sense to run this business directly?

Or would there at some point also be an opportunity to potentially, sort of partially separate your payment of FinTech opportunities from the e-commerce in a more formal way?

I hope you just understand where I'm going with this question.

And then the second question on customer acquisition, I think they're much in line with the messages that you passed on the past quarter that you're investing more on the marketing side and driving further customer acquisition.

I was just curious if you could shed a little bit more detail on where you're maybe seeing the biggest opportunities in terms of driving additional cohorts of customers into your base.

And is that maybe mostly on the e-commerce side or is it mostly on the Pago side on sort of the consumer-facing side?

And are there any specific regions or demographics that you're going after in this push?

Sure.

So the first question, your investment banker question, I think quite the contrary.

When you look at the road map for the next few years, what we still see is significant opportunity for cross-selling across the different pieces of our ecosystem very closely tied to each other.

So when we look at adoption of many of our FinTech products, for example, among our marketplace users, both merchants and consumers, there's still significant adoption opportunities there.

And those are obviously the lower -- lowest customer acquisition costs we have.

So as we roll out our loyalty program and as we try to get better at cross-selling across platforms, the synergies of having these businesses together I think is potentially the biggest competitive advantage and differentiator we have against many of the competitors that we face, both on the FinTech side and the retail side.

So we still see these businesses as very, very intrinsically united and as a critical component of our competitive advantage.

In terms of where new user cohorts and customer acquisition can come from, like I said before, the investments have applied to both the payments businesses and the marketplace.

I think just the nature of the addressable market that we have in front of us in payments probably means that if we look at a 3- to 5-year view, payments should be an area of greater user acquisition as we aspire to become a digital wallet for mass market, but that doesn't mean that there still aren't opportunities to increase the number of users on the marketplace.

We've seen a pickup this last quarter, as we noted, in terms of new users for the marketplace as a consequence of this investment, and I think that's very positive news as well.

So again, customer acquisition investments for both marketplace and payments.

Obviously, payments as we roll out QR and MPOS across multiple countries will probably be their source of new users.

And then as we cross-sell, hopefully, some of those users also become marketplace users.

Regionally, I think the strategy is typically -- we would like to eventually have coverage of all countries.

The MPOS and the QR strategy sometimes do start with a certain regional focus and then expand.

But at the end of the day, our aspiration is to become a payment standard across entire markets.

Our next question comes from Kunal Madhukar from Deutsche Bank.

You talked about new users.

Can you talk about the geographies from which the new users are coming from?

And as you roll out the newer FinTech products, how many users do have that are on both platforms, both the e-commerce platform and are also using FinTech products on a regular basis?

Great.

So if just -- if you look at the ramp-up in investment marketing, as I said before, it's not focused on any specific geo.

Marketing spend as a percentage of revenue has increased sequentially in most markets and certainly in the 3 largest markets.

And so we're looking to drive acceleration in new user acquisition, both marketplace and certainly for payments as we build out the ecosystem across different markets.

You'll probably see the heaviest investments in Brazil, Mexico and Argentina which are the 3 places where we're most focused on right now in terms of building out the (inaudible) ecosystem.

(inaudible) and vice versa.

So we encourage (inaudible) sometimes use the wallet (inaudible) have margin, for example, or (inaudible) MPOS.

So it is something that (inaudible) we see a big opportunity but we do not disclose (inaudible).

And a follow-up on the investment side, so you talked about investment, especially in marketing.

Now that you have much more capital and you also have probably been on more extensive discussions with PayPal with regard to how you're going to invest the investment that they had made, how we are thinking in terms of investment the next few quarters in terms of like the amount of investments and the direction that those investments could take?

Yes.

So I think a lot of investment will be behind the rollout of the fintech platform.

So that's a combination of online marketing, brand marketing, subsidy of MPOS' and commercial agreements, trying to increase the number of large-scale (inaudible) pursue.

There are investments in our logistics efforts for the marketplace as we roll out a growing number of warehouses, rotation centers and distribution centers.

Those are the focus in terms of incremental spend going forward.

Consumer merchant acquisition on FinTech, branding, brand marketing efforts and continued investment in a lot of logistics.

Our next question comes from Gustavo Oliveira from UBS.

I have 2 questions.

The first one is if you could give us the rationale for the flat fee in implementation in Argentina.

And when -- and if you think about removing the flat fee in Brazil, and I would like to understand what are your thoughts on GMV impact if that was the case.

And then the second question would be about your agreement with PayPal.

If there is anything you can comment about it or on whether you expect to finalize in general lines what would be the thinking behind.

Let me start with the second one very quickly.

So we continue to work through implementation details with PayPal more and more working now on the nuts and bolts process and technology.

I think we'll disclose where we come out -- at the appropriate time.

This is a long-term relationship.

So whatever we launch now is the initial, and then we'll see where it goes from there.

But I think it makes more sense to disclose it when we actually launch the different efforts.

The rationalize for the flat fee in Argentina, I think we learned a lot from the launch of the flat fee in Brazil.

And if you look at the way we launched flat fee in Argentina, you'll realize it's a much smaller amount.

I think it's positive in terms of eliminating from the site items that potentially don't really rotate well because there's a fixed cost for very small cost items that aren't that relevant.

But the way we've managed it in Argentina has been not detrimental to units sold in Brazil.

I think in terms of Brazil, whether we would remove it, I think it's something that we will always leave ourselves open to analysis, either removing it or lowering it, but there's nothing that we've announced to our sellers or that had in the cards, that we can disclose right now.

Our next question comes from Pedro Fagundes from BBI.

Just one quick follow-up on the customer acquisition question.

In Brazil, specifically, now that you're investing more heavily in fulfillment adoption and probably also investing more heavily in -- Pedro, yourself you mentioned, maybe MPOS' subsidies and things like that, does it make sense to assume that we should assume relatively weaker margins going to the back half of the year in Brazil specifically?

So we don't give forward guidance on the P&L.

I think we've been answering that we see an enormous mid- to long-term opportunity, a lot of it in the FinTech space.

Obviously, I think we'd raise capital so that we can make sure that we capture jet opportunity over the long run and not try to -- try any specific results over the short term.

So you see incremental investment behind building out our logistics capabilities, building out the FinTech network across multiple geographies.

I think we'll try to remain disciplined in how we deploy capital and make sure that it makes sense for the long term but not focusing on short-term results.

Our next question comes from Jamie Friedman from Susquehanna.

I wanted to ask Pedro or Osvaldo regarding the merchant services growth that was very impressive this quarter.

What is the use case -- online merchant using your merchant service solution?

What I mean is that typically a larger merchant or a smaller merchant?

Is there any profile of who's using the cargo solutions from merchant services?

So this is Osvaldo.

So mostly, we have been focused, I'd say, in the mid-market.

These not the larger merchants.

We usually (inaudible) but the mid-market who would provide a very good solution, both in terms of (inaudible), in terms of fraud prevention, ease of integration, customer support and so on.

And what we have been doing lately is try to focus more also in the long tail, which was not really our (inaudible) in the past.

And so we continue to do drive growth (inaudible), to medium merchants, but we're more focused on the long tail.

And (inaudible) growth over the last year.

Okay.

And I'm embarrassed I don't know this, I should.

But in terms of the QR Code and MPOS overlap, did the QR codes just go to merchants that do not take their mobile point-of-sale?

Or is there a use case where they would have both if someone wanted a noncarded transaction or a carded transaction?

How should we be thinking about like the rollout of the QR versus MPOS?

Sure.

So the MPOS (inaudible) impact this (inaudible) end of the long tail.

So (inaudible) the result in some cases (inaudible) probably in some very large merchant.

For example, in Argentina, we have the likes of (inaudible) or like some (inaudible).

People who are (inaudible)

Our next question comes from Marvin Fong from BTIG.

The first one I guess, could you just update us on your goals in terms of how much you want running over your managed network?

Have your goals changed?

I think you had a plan for over the next 2 to 3 years.

I was just curious based on how you guys have been performing if you updated those goals at all, and...

Can you repeat the beginning of the question?

Yes.

I was just -- I think from talking to the -- before, that there were some goals, but yet spread out in terms of how much the deliveries that you wanted going over the managed network.

I was just curious if you (inaudible) what those -- if you could just remind me what those goals are, and you've gotten more aggressive with your outlook and how much you want running over the managed network on the past few quarters.

Has your thinking changed?

I think we've said that we strive over a multiple-year view to deliver -- delivery times and costs that are best in market.

And as a consequence of that, we would need to run in excess probably of 60% of all units shipped through a network that isn't the old dropship network that we had.

So when we look at the evolution versus that long-term goal, Mexico is at roughly 1/3.

I think of all shipments already not running on dropship, Brazil is slightly above 20%.

Argentina is higher than both of those and we're seeing consistent improvements in terms of lead times and also overall cost.

So I think we remain optimistic with the rollout of our logistics capabilities.

Obviously, if we are at 1/3 and 1/5 in Brazil and Mexico, there's still a lot of work to be done over the next multiple quarters to get to that midterm goal.

But I think we see very good traction in that direction.

And I would say equally important, we see our lead times as being very competitive in all of the markets where we operate.

So things are planning out I think very much in line with what we had set out to accomplish on the logistics front.

Thank you, ladies and gentlemen, for attending today's conference.

This concludes our Q&A session.

You may all disconnect.

Good day.